1. Chapter 5 Credit Management
What is Credit?
Credit is created/extended when a consumer acquires money, goods, and services based on an agreement with lender called a LOAN.
The loan states that credit is extended for
a specified period of time with
a specified rate of interest

2. Chapter 5 Credit Management
The Bad News About Credit
Americans are becomingly increasingly dependent on credit
Credit encourages people to live beyond their means, leading to financial disaster

3. Chapter 5 Credit Management
Classifying Consumer Credit
Revolving or Open-ended
Consumers make purchases up to certain limit
Finance charge on unpaid balance
Regular 30-day charge accounts (open-ended) balance must be paid off each month (Amex)
Installment Loans
Repayment of loan plus interest on regular basis
Home mortgage loan an example

4. Chapter 5 Credit Management
How Much Should You Borrow?
It is IMPORTANT to set DEBT LIMITS
Rule of thumb for borrowing
No more than % of take-home pay should be used to pay installment debt
Mortgage debt should be excluded in this calculation

5. Chapter 5 Credit Management
The Right Reasons for Borrowing
Purchasing large goods and services
Emergencies
Taking advantage of opportunities
Convenience
Establishing credit

6. Chapter 5 Credit Management
The Wrong Reasons to Borrow
Using credit to live beyond your means
Examples:
To meet basic living expenses
To make impulse purchases
To purchase short-lived goods and services

7. Chapter 5 Credit Management
Some Major Credit Sources

8. Chapter 5 Credit Management
National Credit Cards
Issued by large corporations as well as financial institutions
Consumer controls how to pay it off
Balance paid off each time -- usually no interest is charged
Balance not paid off in full -- finance charge incurred
Still one of the most expensive sources of credit

9. Chapter 5 Credit Management
Retail Credit Cards
Good only in stores where issued
Rates comparable to those charged on bank credit cards

10. Chapter 5 Credit Management
Consumer Finance Companies
Assume more risky loans and charge higher interest rates
Loans can be made in small amounts
Easier to receive a loan and more convenient than using bank
Loans are speedily processed

11. Chapter 5 Credit Management
Life Insurance Companies
Policy holders build up not only protection, but also cash value over the years
Amount = to cash value can be borrowed in form of a loan

12. Chapter 5 Credit Management
Brokerage Account Loans
Rates competitive with banks
Amount borrowed a function of the value of securities held

13. Chapter 5 Credit Management
Personal Loans
Written agreements help reduce misunderstandings
Agreement should specify:
Terms of loan
Interest charged
Obligations of both borrower and lender
Advisable ONLY if funds are not borrowed from traditional sources

14. Chapter 5 Credit Management
Pawnbrokers
Pawn brokers accept valuables as collateral
Issue loans for % of valuables
Charge high interest rates ( %)
Demand quick repayment (usually within days)
Should be used only as last resort

15. Chapter 5 Credit Management
Three C’s of Credit : Capacity
Creditors examine:
Current income vs. current
Current debts
Number of dependents
Alimony and child support payment
Future income potential

16. Chapter 5 Credit Management
Three C’s of Credit: Character --
Past credit
Timeliness of payments
Accuracy of information you provided on income, employment, etc..
Stability

17. Chapter 5 Credit Management
Three C’s of Credit: Collateral
Collateral -- something of Value pledged as promise to repay the loan
Protects creditors should loan not be repaid

18. Chapter 5 Credit Management
Credit Bureaus
Clearinghouse of consumer credit information
No judgments made by bureau on credit worthiness of person
Information provided weighed differently by different lenders

19. Chapter 5 Credit Management
Steps to Establishing Credit
Open checking, savings account
Install telephone in your name
Obtain gas credit card
Apply for bank credit card even if offered only low limit
Have parents co-sign loan
Begin repaying student loan

20. Chapter 5 Credit Management
Denial of Credit
Some reasons lenders may deny credit are:
Not enough income vs. expenses
Negative factors such as late
payments in credit history
Several job changes
Incomplete credit background
If denied, lender must give written explanation

21. Chapter 5 Credit Management
Finance Charges
Finance charge -- difference between amount repaid and original amount borrowed
Annual percentage rate (APR) -- interest rate paid per dollar per year for credit

22. Chapter 5 Credit Management
Which Credit Card is Best for You?
The answer depends on your credit card use. Weigh the following attributes accordingly:
If you pay off the balance each month
No annual fee
A grace period
If you carry a balance each month
A low annual percentage rate

23. Chapter 5 Credit Management
Consequences of Credit Abuse:
Repossession of Property
Failure to make a loan payment means the borrower defaults on a loan
If borrower defaults, creditor can seize property and sell it to recover funds

24. Chapter 5 Credit Management
Consequences of Credit Abuse:
Wage Garnishment
One of the strongest actions creditors can take
Court order requiring portion of borrower’s wages paid directly to the lender
Amount deducted by employer from paycheck
Deductions continue until debt repaid

25. Chapter 5 Credit Management
Bankruptcy
A legal process where
A person or business that cannot meet financial obligations is relieved of debt
Courts divide assets and income among creditors

26. Chapter 5 Credit Management
Repercussions of Bankruptcy
Borrowers not relieved of
Back taxes
Alimony
Child support payments
Bankruptcy judgment on person’s credit record for next 10 years
Credit will be difficult to obtain for that time period

27. Chapter 5 Credit Management
First Bankruptcy Alternative –
Chapter 7 Filing
Liquidation plan where assets are seized by court and sold
Funds then prorated among creditors
Usually creditors receive only small portion of funds owed them

28. Chapter 5 Credit Management
Second Bankruptcy Alternative --
Chapter 13 Filing
Also known as the wage earner plan
Individuals establish three-year repayment plan
Allowed to retain possession of their property
Creditors receive % of amount owed them